A blog about economics, finance, business and corporate governance. My background is in economics, with degrees from Columbia and Johns Hopkins. A career in international development, equity capital markets and as a corporate finance chief and board member lead me to think about events in a different way--hence the blog's name.

Sunday, October 21, 2012

Google Blows a Quarter: No Worries

I'm in the process of reading "What Would Google Do?" by Ben Jarvis. I'm very skeptical of books that are written by acolytes or high priests of corporate worship, which is what this book's title suggests. This book does flirt with idolatry at points. However, it is a very interesting and provocative book, ostensibly about Google but it is also about first principles of business models in the digital age.

Google's share price was buffeted last week by mistakes of carelessness and inattention by a vendor--someone pressing "Send" when they weren't authorized to do so and without reading what they were sending---and by disappointment in 3Q 2012 financial results. The basic comment was that Google's take from a mobile ad was lower than that from a desktop ad because of lower rates; the stock swooned. It was probably talked down so that buyers could find a better entry point.

From what I've read about Google, including from Jarvis' book, I would guess that none of Google's founders or senior executives would be the least bit concerned by Wall Street's quarterly hand wringing.

"About half of all U.S. mobile ad spending goes toward search ads, more than the roughly 47% of total digital spending in Web search, according to eMarketer Inc. And Google takes a 95% share of mobile-search revenue in the U.S., estimates eMarketer."

Google CEO Larry Page said that at this point last year Google generated about $2.5 billion from mobile advertising, apps and content. This year, they are on pace to generate more than $8 billion in revenue from these channels! "I am not worried about this at all in terms of our business at all," he said. That's the kind of confidence I like to see.

By contrast, Facebook and Zynga have either been late to the mobile advertising party or slow to generate revenue growth. So, even among its New Digital Age peers, Google is clearly at the head of the table.

In traditional newspaper or media businesses, with considerable overhead and inefficiencies, a corporate strategy would have been to dip the toe into the water of mobile advertising, including "setting" rates at some desired, higher level. Instead, Google's approach is to watch customers and partners create a mobile advertising platform on top of their search platform without any attempt to control or set the architecture or rates.

Instead, Google focused on grabbing a 95% market share of a market which analysts say is only going to grow as corporate marketers themselves get more comfortable with this new advertising medium and move dollars there.

Google, among other things, is all about speed and aggression. One of their senior execs wrote another one of their principles, "Done is better than perfect." Aggression, especially towards any of their competitors, used to be a chromosome in the Microsoft DNA. Microsoft certainly didn't worry about Windows releases being perfect: they went the other way and released really awful bloated, bug-infested software. Let's see how things go in the upcoming Windows 8 release and the uptake in Surface RT. It should be a new day for them.

I need to have a Google expert explain something to me. Their practice of releasing all kinds of versions of Android OS on mobile phones: Ice Cream Cone, Cookie Monster....and not allowing users to easily update to the latest and best version: what is that all about? This makes no sense at all: it borders on Microsoft arrogance, unless there's a nefarious upside I am missing.

Meanwhile, according to CS analyst Stephen Ju, GOOG is selling at 11 times P/E-ex cash, which doesn't seem expensive on any absolute basis. He rates the shares Outperform. (I don't own any shares).